For local banks, Springfield is a good place to be

Shielded from the worst of the chaos, they ride out the recession with confidence

Central Illinois has seen a lag in new home construction, and some builders have gone out of business. But because builders here are relatively small and responsible, Springfield hasn't seen the amount of dislocation that is affecting the homebuilding ind

As America looks around for someone to blame for the current economic mess,
bankers are the easiest target in sight. “No one wants to hug a banker,” reads a recent Newsweek headline, and no wonder. Bankers made the loans that went bad, causing the house
of cards to tumble. Then they accepted government bailout money but spent it on
their own salaries and parties, refusing to make new loans that would get the
economy moving again.

But I know a few bankers, and they hardly seem like the arrogant, clueless guys
we see on TV testifying before Congress. So I went to visit a couple of them,
to learn more about where our local banks are in the financial food chain and
to ask, “How’s business?” There are many more banks I could have talked to, and I don’t presume that all our local banks are in the same situation. But I did get the
impression many of them share the outlook that Springfield is a good place to
ride out a recession.

“We’re totally isolated from the chaos you see in the media,” says Richard McCord, president and CEO of Illinois National Bank. McCord
explained that community commercial banks like INB and United Community Bank
are in a third tier of bank sizes, below the regional commercial banks. At the
top are investment banks, brokerage firms and international conglomerates like
Citigroup. At the top is where the trouble began, not only with the failure of
subprime loans, but also with the declining value of securities backed by
mortgages.

“There is a huge difference between large national banks and community banks like
ours,” said Todd Wise. Wise is president and chief operating office of United
Community Bank, headquartered in Chatham. “The large banks are hampered by low asset quality related to subprime mortgages.
They have suffered from loan losses, write-downs and operating losses.
Community banks didn’t participate in subprime lending. There is just not that big a market for it in
Chatham, Illinois.”

The mortgage loans made by community banks are sold to the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Association (Freddie Mac). “We don’t hold mortgages on our balance sheets,” McCord says.

While the community banks have been spared from the worst effects of the housing
crisis, they can’t escape recession and the slow economy. There are fewer new home loans,
business loans and car loans that normally are bread and butter for banks. “But now the drop in interest rates has caused a huge rush in mortgage
refinancing over the last 60 days,” says Wise of UCB, which so far in 2009 is writing three times its normal volume
of mortgages.

INB also has had “record levels of activity” in mortgage refinancing, McCord says, and he expects mortgage interest rates to
remain low through most of this year. “It wouldn’t surprise me to see it go lower,” he says. Refinancing isn’t a high-profit category for banks, considering the labor that goes into each
loan, but it’s welcome business while banking is slow in other areas.

Agricultural lending, a strong suit for UCB, is a question mark this year. “Our ag business is coming off three of the best years we’ve ever posted,” says Wise. “Grain prices were at record levels. Now we have high input [fertilizer and
herbicide] costs and low grain prices, but that could change.” Even if grain prices return to reasonable levels, most farmers have already
bought the new equipment they need for awhile, so bankers don’t expect much new ag business in 2009.

McCord says INB has been active in construction lending, and has had to
foreclose on some commercial loans used to build spec houses. “We’ve had a few bankrupt builders,” he says. Other bank clients have suffered losses with vacant commercial real
estate. These setbacks are “not catastrophic,” he says.

The community banks are eager to see confidence return, so they can get back to
commercial lending. “There are still those folks who have the ability to borrow who are sitting on
the sidelines,” Wise says. An upturn in the stock market would help. “If people can open up their 401(k)s and they’re up, that’s a confidence builder.”

McCord notes that confusion and dysfunction in state government have added
insult to the national economic injury. Service providers, like nursing homes
waiting for late Medicaid payments, or landlords not getting timely payments
for leased office space, are badly affected. “I don’t like what I’ve seen happen to our state.”

Though business could be better, local bankers are happy to be in the Midwest,
where they’ve escaped the wild fluctuations of the housing market, and in Springfield,
where government, medicine and agriculture are more steady than manufacturing. “In spite of the national recession, this is a good marketplace,” Wise says.

“I thank my lucky stars I’m not in Detroit,” says McCord. “Even here, the recession hasn’t been fun, and there are a lot of worried people. But it is a very good time to
be in Springfield. We’ve been incredibly well-received. We’ve stayed profitable every year. And 2009 looks like it will be a good year.”

A time of economic dislocation presents many challenges to banks of all sizes,
and some banks with weak assets and bad loans on their books may not survive.
Nationwide there have already been nearly as many bank closures in 2009 as
there were in all of 2008. But for banks with strong assets and balance sheets,
in crisis there is opportunity. “There are a lot of banks, including ours, that are willing to move on good
acquisition opportunities,” says Wise of UCB.

“We just experienced a very good year in 2008,” he says. “We plan on having a good year in 2009.”